The legal framework for private sector development in a transitional economy : the case of Poland

WORKING PAPERS

The World Bank November 1991

WPS 800

The Legal Framework for

Private Sector Development

in a Transitional Economy

The Case of Poland

Cheryl W. Gray

Rebecca J. Hanson

Michael A. Heller

Peter lanachkov

Daniel T. Ostas

and

Youssef Djehdne

Poland is rapidly developing a reasonable legal framewor-k to

support its transition to a market economy. Yet legal practice

lags behind. Precedenit and

expertise

mLust

built

through

training and experience.

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Public Disclosure Authorized

Public Disclosure Authorized

Public Disclosure Authorized

Socialist Economies Reform WPS 800

This paper- ajoint product of the Socialist Economies Rcform Unit and the Legal Department's Private

Sector Development Advisory Group - is part of a larger comparative study in PRE of evolving legal

frameworks in Eastem Europe. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact CECSE, room N6-035, extension 37188 (33 pages). November 1991.

The economics of Central and Eastem Europe of socialism, and it is being revised as thc

are in the midst of a historic transition from country moves toward a private market

central planning and state ownership to develop- economy. The current legal framework in

ment of a market-driven private sector. This Poland closely follows other continental

jurisdic-transition requires comprehensive changes in tions and has a clear and reasonable intemal

"rules of the game" - including the legal logic. Many of the laws (including the civil code,

framework for economic activity. the commercial code, and the bankruptcy law)

are old, but most arc flexible enough to permit a

A market economy presupposes a set of wide range of modem, market-oriented activity.

property rights and a system of laws or customs Recent legislation (including the antimonopoly,

that allow the exchange of those rights. The securities, and foreign investment laws) appears

legal framework in a market economy has at to be well-designed for private sector

develop-least three basic functions: ment. Property law, however, remains a

i Defining the universe of property rights in "jungle."

the system.

- Setting the rules for entry into and exit from Although the legal structure is generally

productive activities. satisfactory in most areas, practice is still very'

e Setting the rules of market cxchangc. uncertain. The get rality of the laws Icaves

These legal tasks are accomplished by such wide discretion for administrators and courts,

fundamcntal areas of law as: and therc has not yct becn timc to build up a

* Real and intangible property rights. body of cases and practice to define further the

* Company, foreign investmcnt, and bank- rules of thc game. The wide discretion and

ruptcy law. general lack of precedent create tremendous

* Contract and competition law. legal uncertainty that is sure to hamper private

sector development. The answer is not a change

Poland has a rich lcgal tradition dating from in the law, but a building of precedent and

pre-socialist times. This tradition was sup- expertise through training and through

dissemi-pressed but not climinated during its forty years nation of information.

The Policy Rcsearch Woiking Paper Series disseniinates the findings of work under way in thc Bank. An objective of .he serics is to get thesc findings out quickly. even if presentations are lcss than fully polishcd. The findings, interpretations. and conclusions in thesc papers do not necessarily represent official Bank policy.

I. Rights to Real Property 2 Fundamental Concepts of Ownership--Recent Constitutional and 3

Civil Code Reforms

Remaining Issues in Real Property Law Reform 5

Conclusion 8

II. Rights to Intellectual Propertv 8

III. Company Law 9

Characteristics of a Joint Stock Company 10

Characteristic of a Limited Liability Company 11

Characteristics of the Two Forms of Partnership 13

Procedures for Establishing a Compan7 14

IV. ForeiRn Investment Law 16

Form and Ownership 16

The Approval Process 16

Profit Repatriation 17

Tax Incentives 17

Dispute Resolution between Investors and the State 18

V. Contract Law 19

Origins of the 1964 Civil Code 19

Central Features of Socialist Contract Law in Poland 19

The Current Situation 21

VI. Bankruptcv 22

The Law of 1934 23

The Law in Practica 24

Related Concerns: Credit-rating Services 25

and Rules on Collateral

VII. Antimonovolv Law 25

VIII.Judicial Institutions 27

The Court System 27

Arbitration in Poland 29

IX. Conclusion 32

The Legal Framework for Private Sector Development in a Transitional Economy:

The Case of Poland

The economies of Central and Eastern Europe are in the midst of An

historic transition from central planning and state ownership to market-driven private sector development. Thie transition requires comprehensive changes in

the "rules of the game"--i.e. the legal framework for economic activity. Markets presuppose a set of property rights' and a system of laws or customs

that enable the exchange of those rights. The legal framework in a market economy has at a minimum three basic functions:

(1) to define the universe of property rights in the system,

(2) to set the rules for the entry and exit of actors into and out of productive activities, and

(3) to set the tules of market exchange.

Each of these three functions typically involves numerous areas of law. Property rights are defined in practice in most market economies by a wide

array of laws regulating the ownership and use of real, personal, and

intangible property, as well as shares in going concerns. Company, foreign investment, and bankruptcy laws are among the subset of laws that govern the entry and exit of actors into and out of prodietive activities. General rules

of market exchange tend to be laid out in contract and competition law, while more specific rules of market exchange in particular soctors may be governed by more detailed laws and regulations.

This paper analyzes the evolving legal framework for private sector

developuent in Poland using this general classification. 2 Poland has a rich

legal tradition dating from pre-socialist times. This tradition was

suppressed but not eliminated during its 4C years of socialism, and it is

being revised as the country moves toward a private market economy. The current legal framework in Poland follows closely other continental

jurisdictions (particularly the French system) and has a clear and reasonable internal logic. While many of the laws are old (for example, the company lew--the Commercial Code--and the Bankruptcy Law date from the 1930s), most are flexible enough to permit a wide range -f modern market-oriented activity. Underlying property and contract rights are laid out in the 1964 Civil Code, modelled closely after the French Napoleonic Code. Although adopted under the

socialist regime, the Civil Code was drafted by law professors and--after being recently purged of socialist rhetoric--is suitable for a market economy. Recent legislation--including the 1990 Antimonopoly Law and the recently

1 As used in this context, the term "property rights" includes rights to real, personal, and intellectual property.

2 It is part of a larger comparative study on evolving legal frameworks in Eastern Europe.

adopted Securitiee and Foreign Investment Laws--appears to be quite well-designed for private sector development. A new personal income tax law was recently adopted, and a new Value-Added Tax lav is being considered in

Psrliament and probably will be adopted in early 1992. The most problematic area is property law, which is still--in the words of one Polish legal

practitioner--a "jungle".

Although the legal structure is generally satisfactory in most areas, practice is still very uncertain in all areas. The generality of the laws leaves wide discretion for administrators and courts, and thare has not yet been time to build up a body of cases and practice to further define the rules of the game. Although the courts are in general honest and are in fact used by the population, they have little experience in economic matters. Judges are not well paid, and the best lawyers have a strong incentive to go into private practice. The wide discretion and general lack of precedent and competence create tremendous legal uncertainty that is sure to hamper private sector development. The answer is not a change in the law, however, but a building of precedent and competence through training and through

dissemination of information.

Rights to Real Property

Property rights reform has lagged behind legal reforms for general business activity in last few years in Poland. The country is now facing

legal dilemmas similar to those encountered in its Central and East European neighbors. Across reforming socialist economies compensation laws for prior

expropriations are creating tremendous uncertainty, land registration and court adjudication systems are underdeveloped, transfer laws for state

property are sparking conflict among levels of government, and privatization laws for real property (particularly housing) are undermining both financial system stability and local government solvency. Many specific procedures for real estate development and transfer are either missing from the current legal

framework or are cumbersome and in practice unenforceable. Developing economically and environmentally sensible real property regulations and removing current legal bottlenecks is critical for sustained private sector investment.

While land was always considered a means of production under socialist law, its categorization varied in different socialist systems. For example, the Soviet Union took the position that land must be exclusively under state socialist ownership. In Poland, in contrast, private ownership of land

remained the rule, not the exception. Poland placed certain land under state ownership, including all of Warsaw, much other urban land, land occupied by state-enterprises, and about 20 percent of agricultural land (primarily in the northvest area recovered from Germany after World War II). Sale of public laad was rare in Poland because of the constitutional protections of state property. Private or cooperative acquisition of state property for

construction was instead governed by the principle of perpetual usufruct, a legal form that gave the land user rights similar to ownership, typically for

99 years on payment of a yearly fee. Either private individuals or tenants' housing cooperatives could hold rights of perpetual usufruct.'

Fundamental Concepts of Ownership--Recent Constitutional and Civil Code

Reforms

Two fundamental principles, and the regulations that derive from them, distinguish a socialist from a market system of real property rights: (1) the hierarchy of types of property ownership depending on the nature of the owner,

'-nd (2) tha indivisibility of state ownership. Recent amendments to the Polish Constitution and Civil Code have removed both of these principles.

Hierarchy of ownership. The 1952 Polish Constitution (Articles 7-8 and 11-13) defined the main categories of ownership, while the details were

governed by the 1964 Civil Code. Under Polish socialist law, "social ownership"--including ownership by the state, cooperatives, and social

organizations--was the highest categorJ of ownership and was protected by the Constitution and the Civil and Criminal Codes. Typically, such property

included means of production, including, for example, land, mineral resources, and public utilities. In contrast, property used for personal consumption was individually owned and considered "personal property." Personal property could include, for example, one's dwelling house but not a rental house, which was considered a means of production. Finally, "individual--or private--property" was defined as the individual ownership of means of production, a

residue of presocialist economic relationships founded on exploitation and expected to "withcr away" over time. Individual property received less

constitutional protection than social or personal property and was subject to heavy taxation and numerous limitations on use and transfer.4

On December 29, 1989, the Polish Constitution was amended to elimtnate the socialist property classifications and instead treat all types of property

3 There were four main forms of housing ownership under socialist law in

Poland: (1) State rental apartments were typically allocated to families, who then had near-ownership rights of tenancy and inheritance but circumscribed rights to sublease and no right to sell (although they could "trade" for units occupied by other families). (2) Employee housing was allocated according to the employment relationship. (3) Cooperative housing units in multi-family

inits took one of two forms determined at the time of allocation: (a) tenancy, which was non-alienable, non-transferable to successors (other then those

registered as living on the property), and uiot subject to execution or (b) ownership, which was alienable, transferable and subject to execution. (4) ?rivate housing (individual houses or apartments) was limited to a single unit for family use, i.e. personal property. Additional private units were

"private property" and were heavily regulated -- for example by the 1974 Housing and Tenancy Act and the 1985 Land Use and Expropriation Act -- with

the state allocating tenants, setting rents, and determining the landlord/tenant relationship.

4 Another form of property, "cooperative" property, was considered transitional, to be transformed to social ownership in the future.

equally in civil, administrative, and criminal matters. In particular, Article 7 was amended to read that the Polish state "protects and fully

guarantees private property." In 1990, the Civil Code was amended to abolish the distinction between personal and private property.5 In additior to

protect_.n.g private property, the constitutional amendment also s;ates that "expropriation is permitted only for a public purpose and for just

compensation.' This amendment narrowed state powers contained in the Land Use and Expropriation Act of 1985, and the limits to state power were spelled out further in 1990 amendments to that Act.

Indivisibility of atate ownership. The socialist state, as

representative of the entire people, owned all state socialist property under the previous system, and such ownership belonged "indivisibly to the State"

(1964 Polish Civil Code, Article 128). Under this theory, neither local

governments nor state-owned enterprises owned the ptoperty they used, managed, or transferred; rather they had the ownership-like -ight of "operational administration." Because property was indivisible, ownership was

indeterminiate; those who "operationally administered" property could lease but not sell it.

Assigning state property to specific government owners is proving to be one of the most complex challenges in the transition to a market economy. In Poland it has so far been a three-step legal process. First, a 1989 amendment to the Civil Code (Article 128) named the Treasury or other state legal

personae as the legal owner of state property, the first step to making such

property alienable. Most state enterprises could then become owners of the land and buildings they previously administered. Second, forty years aft~-r abolishing local governments, Poland reestablished them in 1990. The Act on Local Autonomy established a framework--not yet implemented--to assign local

governments revenue rights (including taxation) and spending responsibilities (including land use planning, infrastructure provision, and housing

management). The implementing regulations transfer without payment certain state property to the local governments, particularly property previously under their "operational administration"--including most urban land, the housing stock, public utilities, and certain state-owned entetprises. Once divided among state actors, state property can then be legally alienated to private investors. Third, 1990 amendments to the Land Use and Expropriation Act gave the state and local governments the right to sell land outright, rather than being limited to granting only rights of usufruct.

5 While this equality of property has been incorporated into the Constitution and the Civil Code, distinctions between public and private property have not yet been eliminated in other areas of law.

Remainina Issues in Real Propertv Law Reform

Although fundamental principles of ownership in the Constitution and Civil Code are now in line with the needs of a market economy, more specific reforms in land and housing law are not well advanced. The area is extremely complex, governed ap,arently by over 50 different laws, Langing from

agricultural land ttansfer to urban land taxation. Most land formerly under public owne-ship now lacks clear title. Poland has an opportunity to learn from other socialist economies in transition. For example, East Germau.y's compensation law is tying up substantial amounts of property in litigation, and Hungary's housing privatization law is destabilizing the financial system while undermining local government solvency. Poland can also learn from good

practice: Bulgaria eliminated most socialist rental regulations with little social dislocation.

Reprivatization. Poland is now struggling with issues of cempensation for expropriated former owners: how far back in time to go, whether to offer monetary or in-kind compensation, and what form compensation procedures should

take. Plans within the government for resolution of outstanding expropriation claims--"reprivatization"--range from no compensation at all to in-kind return of land, with voucher comrensation the most likely. The severity of the

problem varies in importance in different parts of the country. Warsaw's land was all nationalized after World War II, while land in other cities remained

in private hands. On the agricultural side, only about 20I of the land is in state hands, as noted earlier. Until the reprivatization issue is settled, very little land with clear and indisputable title will be available.

Unsettled claims on land make land sales difficult and stalls investment. Reprivatization is an area where technical assistance may be particularly

appropriate: Poland is in a position to learn from other socialist economies that have already moved ahead with compensation acts, including Hungary and the former East Germany. In particular, Poland must carefully weigh the effect of in-kind compensation on the security of title. Other important concerns include the length of claims periods and the effects of alternative reprivatization schemes on fragile registration and court adjudication

systems.

Communalization. The process of transferring state property to local governments--"communalization"--began simultaneously in all 2500 communes but has now stalled. Until the process is completed, with the land inventoried, disputes resolved, and land properly registered, local governments cannot make legal transactions to sell communal property.6 Currently local governments are concluding some short-term leases, typically for high rents and only one-year terms. Generally local governments cannot make available land with clear title for sale or long-term lease, an essential element for sustained private sector investment. Communalization is a key area where technical assistance

6 In particular, conflicts have arisen between local governments and state-owned enterprises due to the awarding to the latter of their own grounds. Because of undefined land title, capital shortages, and

inappropriate taxation incentives, state enterprises have typically built large, low buildings, and claimed and held substantial amounts of vacant land.

may be appropriate, particularly to help streamline the process of registration and the adjudication of plots.

Land Registration. A well-functioning registration :ystem is the legal bedrock of any real property system, essential to securing and finaneing most investments. Ownership in a civil law system is determined by reference to the real estate register. koland's registry system is in a state of d'Lsarray. Priot to the socialist takeover, three separate registration systems--Russian, German, and Austrian--existed in different parts of the ecuntry. Many of

these registers are now missing or incomplete. Under socialism, the

registration system was largely neglected _{for land under state ownership. As} in other socialist countries, there were significant incentives for both individuals and the state not to comply with registration requirements. Therefore many transfers _{were not recorded. In Warsaw, for example, the} pre-socialist owner is often still listed as the owner of record despite

subsequent transfers.

Notary system. The notarial system is considered by many to be a key constraints to emerg4ng markets in land and housing.' All land transactions must by law be notarized to have legal effect. Yet until recently notaries have been state employees; numbers have been inadequate and transactions slow.8 A recent positive step has been the privatization of state notaries. The property registers have been moved from the neglected state notary bureau into the court system, which is, however, not yet well-equiped to administer them. A review and streamlining of the notary process is needed, an area where technical assistance could be useful.

Controls on use of real _{_roperty. Even where ownership is clear at} present, many controls on the use of real property remain narrow or unclear. Many of the responsibilities for directing real property use have been

devolved onto local governments, but without giving local governments the authority to exercise that responsibility properly. Deregulation should be a high priority. And after stripping away the dead weight of inappropriate regulation, Poland will have to develop economically and environmentally sensible regulation in its place. Appropriate regulation of land use is an area where there has been substantial research and experience in recent years in market economies and an area where technical assistance could be rapidly fruitful. The three main areas for concern are: (1) zoning regulations, (2) building codes, and (3) rent and ownership regulations and price controls.

a. Land Use Plannina. Warsaw has emerged from socialism with a highly inefficient pattern of urban land use. The static, end-state socialist land use planning system, coupled with reliance on industrial large panel

construction methods, led to relatively high infrastructure and transportation costs with few spatial _{economies. Currently, the land use system is in limbo.} Old regulations are not being followed, authority to regulate has not been

7 It is also a bottleneck to the formation of companies, as discussed later in the paper.

vested fully in local governments, and no general land use framework has been

set. A modern land use planning system is needed, one that offers wide

discretion to the market, permits rapid, inexpensive, and accescible dispute resolution, and internalizes environmental and locational costs.

b. Buildinx Standards. A new construction law has yet to be written with affordable building standards for the types of office and

residential buildings that market systems are likely to produce. Discussions with legal practitioners suggest that, in the current unsettled environment,

side payments are often required to secure location and building permits. c. Ownership and rent regulations and rent controls. There are numerous restrictions on land usA and transfer that need to be reviewed and in

streamlined. These include, fo- example, the numerous use and transfer

restrictions for agricultural land, including prohibitions on conversion of such land to urban and industrial uses. Another restriction that should be reviewed is the requirement that majority foreign-owned corporations get approval from the Ministry of Internal Affairs to purchase land or enter into long-term leases. Although it is understandable that Poland wants to monitor land purchases by foreigners in the short run, given the currently volatile state of land markets, legitimate foreign investors should have ready access to business premises. The current approval process can reportedly be a

lengthy procedure and can force some foreign investors to rely on the limited available forms of short-term lease.

Use of state-owned rental housing is strictly controlled. The many restrictions on subleasing and conversion of rental units encourage massive and inefficient evasion, an experience common to socialist economies.

Furthermore, rent levels are still controlled by the central government and do not allow local governments even to recover operating costs for housing stock, much less to service debt on infrastructure. Finally, the lack of a

functioning foreclosure and eviction system is a key legal obstacle in Poland requiring priority attention: it prevents emergence of a private rental

sector, constrains commercial real estate development, and stunts development of a housing finance system, a system which can be an engine for economic development. While a foreclosure and ev'ction system is in place legally, it has apparently never been used, despite over forty years of mortgage lending. Even as written, the procedure appears cumbersome and ill-suited to the needs of modern mortgage lending. For example, the foreclosure procedure requires the court auction to reflect an ex ante "market" price- New foreclosure piocedures that allow property to be securitized but that also fit in with local cultural norms might include forms of pledge, third-party guarantees, and liens on bank accounts and other movable property.

The legal forms for multi-family dwellin2s. The legal forms for

managing multi-family dwellings will have a critical effect on the emergence of a viable real estate industry and on any eventual housing privatization. Reform of the law on cooperatives has been stalled, but is important for the emergence of housing markets. Cooperatives still have an unclear form within the civil law property clarifications Poland has undertaken, with a status somewhere between public and private. There are numerous restrictions on sale and transfer of cooperative property. Mortgages can not be issued to

8 individual cooperative members, but only to the cooperative as a -vhole. At present there is no condominium law, an important legal tool for management of multi-family _{housing. Poland also has not yet confronted tne insed to develop}

clear rules for building management in partially privatized buildings. Conclusion. Real property rights reform in Poland threatens to become a key bottleneck in the transition to a market economy. Many legal proceaureu remain untested, others are clearly inadequate, and further gaps are emerging through practice. Unless investors are reasonable assured of ownership, use, and transfer rights in propert , they simply will not invest.

Rights to Intellectual Propertv

A broad framework for protecting intellectual property exists in Polish law. Patents, trademarks, and copyrights are protected under domestic law, aAd Poland is a signatory to most major international treaties on intellectual property.9 Relevant Polish statues include the Civil and Commercial Codes, the Unfair Competition Law (1926), the Copyright Law (1952), the Law on Inventions (1970s), and the Trademark Law (1985).'°

Although a broad framework exists, certain items--including

pharmaceuticals, computer chips, and computer software--are not well protected by existing law, and the need for new ir:tellectual property legislation has been acknowledged. The EC directive on intellectual property is likely to be the model upon which any new laws are based. Foreign treaties have provided much of the impetus for revision of existing law. A 1990 U.S.-Poland Business and Economic Relations Treaty obligates Poland to extend copyright protection to computer programs and to adhere fully to the Paris Act of the Berne

Convention by January 1, 1991. The 1991 US-Poland treaty on the p:otection of investment and intellectual property obligates Poland to extend the coverage of its patent law to cover pharmaceuticals. There has been great resistance to these treaty provisions on the part of the software and pharmaceutical lobbies, which feared incurring liabilities due to their use of foreign intellectual property over the past forty years.

9 These include, among others, the Paris Convention of 1883 (1967 Stockholm text) (patents) and the Universal Copyright Convention. To date Poland has adhered to only the administrative provisions of the Berne Convention--1971 Paris text (copyrights), but it is obligated under treaty with the U.S. to adhere fully to the Paris text of Berne by January 1991. Poland is not a signatory to numerous treaties, including the Madrid Agreement for the International Regi",.-ation of Trademarks of 1891, the Patent

Cooperation Treaty of 1970, or the Hague Agreement for the International Deposit of Industrial Designs of 1925, all of which allow for "one-stop" international registration of intellectual property rights.

'0 This study did not go into detail into the letter of the law in the area of intellectual property, and there may te specific problems with the wording of certain provisions in the various laws.

Problems foreseen with this area of law are similar to those encountered in other areas. The administrative body (the patent office) is not prepared for new and more sophisticated problems. There is a lack of qualified

individuals and specialists to regulate the area. Investigation procedures are weak. And infringement proceedings are seen as state in-ervention, which is still politically unpopular.

Company Law

The current applicable company law in Poland is the Commercial Code of 1934. Although the law fell into disuse during the Communist period, it was nevor formally abrogated," However, a variety of governmental restrictions

(e.g. lack of necessary permits and prohibitive taxation) made this law

virtually unusable. During this period, the Commercial Code was not taught in the universities; neither was it a subject ._or litigation, offering lawyers and judges no experience with its application. Thus, the Commercial Code faded from Poland's legal memory until the 1980s, when it was revitalized in order to accommodate Poland's economic liberalization. The comeback started with the Law on State 'nterprises of 1982, which opened up the possibility of

creating joint ventures with foreign or domestic partners .i The first

Foreign Investment Law (paeecd iri 1986) and the later Foreign Investment Laws of 1988 and 1991 called for foreign investment tc be in the company forms provided in the Commercial Code.

While specific provisions in the Commercial Code could be slightly modernized, the consensus of lawyers in Warsaw is that these forms are

adequate for the formation of private companies. Until the 1940's the Code was a functioning regulatory framework for companies. The market within which

the Code operated, however, differed from current market conditions. For example, no strict rules were seen as necessary for limited liability companies becaAse, at the time, they tended to be smaller, family-type businesses that were self-regulated through personal relationships between partners with personal stakes in the business. As the western market

economies developed and more economic actors entered into the marketplace through widespreAd ownership of shares, the laws developed accordingly in an effort to protect new classes in need of protection. Indeed, the development of most company law reflects the constant shifting of protection for various interests, whether the company, creditors, the investing public, managers, employees, or the national economic interests of the state. The coming years should witness tha natural evolution of Polish company law as it seeks to protect newly emerging social and financial interests.

£1 Apparently some types of state-owned companies, including Foreign Trade Organizations and some banks, continued to be organized as companies under the commercial code. The Civil Code of 1964 abrogated all but sections 9, 11, and 12, which deal with company forms.

The two corr.orate forms allowed by the Commercial Code are the limited liability company ("LLC") and the joint stock company ("JSC"). The limited

liability company is similar to the French S.A.R.L. (societe a responsabilite

linitee), the German GmbH (Gesellachaft mit beschrankter Haftung), and the private corporation in Anglo-American law. The joint stock company resombles the French S.A. (societe anonyme), the German AG (Aktiengesellschaft), and the Anglo-American public corporation. As noted in more detail below, there is relatively little difference between the two (less than between the two

analogous forms in other market economies); the LLC is the preferred form for

most investors, because it is more flexible and less cumbersome

bureaucratically. In addition to these two corporate forms, bu6.nesses can operate through one of two partnership forms, the Registered Partnership (governed by the Commercial Code) or the Civil Partrership (governed by the Civil Code).

Characteristics of a Joint Stock Company

CaDital and disclosure requirements. As mentioned above, the Polish joint stock company resembles most closely the French SA. At least three founders are necessary, unless tne State is a founder. Minimum capital of 250,000,000 zlotys (about US$23,000) is required.'3 This may include the value of in-kind contributions, which are evaluated by private auditors and

confirmed by co_..rt-appointed experts. V_luation of assets in all the eastern European countries has been a great problem in privatization, and the same problems could prevsil in valuation for the purposes of determining a company's initial capital.'4

The Commercial Code's provisions on the joint stock company incorporate the principles of transparency common to western corporations statutes.

Disclosure requirements make financial data on companies available at both the court of registration and the Ministry of Industry and Trade, and

announcements of public subscriptions, including investor information, are mandatory.

Rights and duties of shareholders. Both registered and bearer shares are allowed, and these are. exchangeable for one another unless otherwise stipulated in the articles of association.'5 Shares are transferable, but

13 Although all shares must be issued, not all capital must be paid-in up-front. Only 25 percent of the value of registered shares must be paid-in. This is considered an advantage over the limited liability form, for which all capital must be paid-in up-front.

" If the court-appointed regulators determine a value that is at least

202 lower than that declared by the founder, then subscribers are free to renounce their part in the company.

'5 Bearer share.' may only be issued upon full payment. Partial payment may purchase certificates entitling the holder to the shares upon paying the

balance. Registered shares may be purchased for partia' payment. They may also be issued in exchange for the duty of repeated non-monetary

the articles of incorporation may stipulate that registered shares may be transferred only with permission of the company (i.e. the Board of Directors) or they may otherwise restrict transfer of shares. However, if the article of association does not provide a mechanism for identifying another purchaser, the seller may sell his shares freely.'6

Shareholders are entitled to dividends and to a return of the company's assets in the event of liquidation. However, interest bearing shares are not allowed. This distinguishes Poland's law from those of Hungary and

Czechoslovakia (creations of receimt vears), both of which allow for the issuance of interest-bearing shares. Interest-bearing shares require the company to pay interest on the shares, regardless of how much company profit is earned. Such shares are prohibited in most western countries, because they confuse the basic distinction between bondholders (i.e. creditors) and

shareholders (i.e. owners). With ownership comes risk, and interest-bearing shares are an attempt to create ownership without its attendant risk. Yet interest-bearing shares might prove useful in countries trying to encourage private ownership of companies by an inexperienced and risk-averse population.

A share entitles its holder to at least one vote at the appropriate meetings; there are no non-voting shares, although "a company's articles may

restrict the voting power of shareholders holding a larger number of shares" (Article 404). Certain shares may be assigned preferences with regard to voting rights, dividends, or claims on assets in the event of dissolution, with terms to be defined by the company's articles of association." Also,

certain registered shares (which may be transferred only with the company's consent) may be linked to the obligation of repeated non-pecuniary performance for the benefit of the company. These provisions that differentiate the

rights and obligations of various shareholders enable control to be concentrated more than ownership, which may be helpful in addressing the

Polish desire for widespread ownership of privatized companies while

maintaining strong corporate governance.

Characteristics of a Limited Liability Companv

Although not fundamentally different in concept, the Polish limited liability company is a more flexible form than the joint stock company and is

contributions, but only with consent of the company.

16 This provision allowing the company to restrict the transfer of registered shares removes the characteristic distinction between the joint stock company and the company limited by shares known to the French system. Under French law, only the limited liability company, or societe a

responsibilite limitee, may condition the transfer of the company's shares on the consent of either the shareholders and the Board of Directors (i.e. the shares are "saleable"). In contrast, the shares in a joint stock company, or societe anonyme, are freely negotiable, meaning no permission is necessary to sell these shares.

therefore preferred by most domestic and foreign investors. Only cne founder La necessary. The minimum capital requirement is only 10 million zlotys. Shareholders are free to negotiate how profits will be distribu-ed, how voting rights will be assigned and exercised, how large the majority vote and quorum must be to validate the shareholders' general meetings, and how rights to choose representatives on the supervisory and management boards will be allocated. A partner's share is transferable by statute, although the law permits the company's articles of association to make transferability contingent upon the consent of the company's board or shareholders. (If consent is refused, the requesting party may appeal in court.) The Polish commercial code is even more flexible than most Western company legislation, where, for instance, majority and quorum rules cannot generally be changed.

This flexibility allows partners to a joint venture to arrange a balance of power reflecting their perceived real contribution to the company rather than merely the distribution of shares."

That permission may be required to transfer one's shares in a limited liability company--a provision common to analogous company forms in other market economies--reflects the assumed nature of that company. Limited

liability companies in most market economies tend to be smaller, closed companies--for exampla, family concerns. Permission to transfer shares is a way of controlling ownership, which is desired by the participants because

shareholders are expected to take an active part in the affairs of the company; passive shareholders are not expected to invest. Because those involved in a limited liability company are small in number and expected to communicate, given their close interest in the company, the legal requirements

of the limited liability company are fewer (e.g. less strict reporting requirements, lower capital requirements). Since the investing public at large is not at risk, the state has less of an interest in regulating the company's activities.

The Polish Commercial Code places no maximum limit on the number of people who may constitute a limited liability company. This diminishes the difference between the limited liability company and the joint stock company

in Poland, making the limited liability company more attractive, particularly to foreign investors. Whereas in most industrialized countries, limited

" An example of the importance of this flexibility can be seen in

recent negotiations between the Polish Post Telegraph and Telephone ("PPTT") and two foreign investors to create a joint venture to build and operate a cellular telephone system in Poland. Polish telecommunications regulations required that PPTT maintain majority ownership of the venture, yet the foreign partners--providers of both the capital and the technology for the venture--wanted to have de facto control over the decisions of the company. The

parties negotiated an arrangement that (a) gave PPTT 51 percent ownership of the shares in the company but (b) gave the foreign investors the right to choose a majority of the members of the superv4-ory and management boards and (c) increased the threshold for the quorum and majority vote needed to

validate the shareholder's general meeting from 51 to 60 percent. This arrangement is not yet final, and has not yet been approved by the court of registration.

liability companies must automatically transform to joint stock companies after reaching a certain membership (for example, 49 in France), the Polish law appears not to set such a restriction. This most likely reflects the period in which the Code was drafted--that is, when the need to regulate growing companies was not yet felt.

In sum, the limited liability form imposes less rigorous requirements on shareholders than the joint stock form. Its minimum capital requirement is lower, not all capital must be paid-ir. up-front, and the procedures for

evaluating contributions and making decisions on corporate governance are less strict that for a joint stock company. Since the limited liability form of the company is favored by both domestic and foreign investors, it is likely to remain predominant for some time.

Characteristics of the Two Forms of tartnership.

The two partnership forms currently in use are the Registered

Partnership and the Civil Partnership. The former is more flexible than the latter and is better suited to larger initiatives where partners'

contributions, rights, and responsibilities are not necessarily equal.

The Registered Partnership is governed by Section IX of the Commercial Code. It is a general partnership form imposing unlimited ("joint and

several") liability on all partners. Partners are free to assign management responsibilities and to define their respective shares in profits and losses

through a deed of partnership, but this deed cannot assign management

responsibilities to outside third parties to the exclusion of partners, and it cannot limit any partner's access to information about the partnership.

The Civil Partnership is governed by title XXXI of the Civil Code of 1964 and is a less flexible form intended to cover simple initiatives among a few equally-involved individuals. It is defined as a contract (as evidenced by a "deed of partnership") between two or more persons who bind themselves to attain a common economic objective. Each partner may contribute property, rights, or services to the partnership; the partners' contributions are

presumed to be of equal value, and the partners are entitled to share equally in both the company's profits and its losses. The main benefit of this form over no c-ompany form at all is that it protects the common property of the group from outside encroachment by third parties. Jointly-held property is not divisible among the partners for the life of the partnership, and a

partner may not sell his share. Furthermore, jointly-held property may not be used to satisfy a creditor's claims against an individual partner, although a creditor may seek the dissolution of the partnership in order to gain access to a partner's share. A partner may withdraw from the partnership and recover his original contribution in kind (or its cash value) plus an appropriate portion of the partnership's accrued profits. As with the Registered

Partnership, partners are jointly and severally liable for the obligations of the partnership. Partners are expected to be active, each being "entitled and bound to manage the partnership's affairs."

Procedures for Establishing a ComDanv

Although the basic framework for company law appears reasonable and admirably flexible, the process of establishing a private company in Poland--while simplified greatly in recent years--continues to require time and

expense. Future reforms in the area of company law should in particular address the role of notaries and procedures in the Court of Registration. The following steps are currently required to open a private corporation in

Poland.

The articles of association. When establishing a company in either the joint stock or limited liability form, the founder must first draft the

articles of association. The articles of association state the company's name and founders, define its object, and set out the specifics of its stock

capital (i.e. number, classes, and nominal values of shares). Previously, companies with foreign participation were required to seek approval from the Foreign Investment Agency, which application included a number of documents

informing the Agency of the legal and financial status of the foreign partner. Now, however, with the passing of the new foreign investment act of June 14,

1991, such approval is no longer necessary (see discussion below). While the Commercial Code of 1934 requires that foreign-owned 4oint stock companies

involved in areas of state significance or public utilities seek the

permission of the Minister of Industry and Trade, it is assumed that the 1991 foreign investment act supersedes this requirement, even though that provision of the Commercial Code is not explicitly abrogated by the new foreign

investment act.

Notary approval and stamp fees. Once the articles of association are drafted, _{they must be approved by a notary. Unlike those of common law}

systems, civil law notaries take a much more active role in approving official documents. A limited number of notaries have enjoyed a de facto monopoly in the market; they are difficult to find and there is little room for choice of notary. Until recently all notaries were state employees. The profession is now being privatized and opened to entry. Because Polish notaries have little experience in contemporary corporate forms, they may not understand complex or innovative arrangements, and Polish lawyers report that Articles of

Association must sometimes be simplified in order for the notary to understand them. Notaries often offer advice on the Articles' content or have difficulty understanding innovative arrangements. Getting notary approval is reported to be at times a time-consuming and frustrating process.

It is also quite expensive. Notarial fees must be ruid for every notarial act involved in the founding of a company. Notarial acts inc.ude approving a company's Articles of Association and subsequent amendments to them, including increases in capital. Notarial fees equal 3% of equity capital up to 250 million zlotys, plus .01% of the equity capital over 250 million.19 Debt financing is apparently not subject to notarial fees.

19 These fees are aet out in section 9, para. I of the Regulation of the Ministry _{of Justice dated 10/23/89 (as amended 1990).}

Stamp duties are another cost in starting up a company. These are

equivalent to the French "droits d'enregistrement" (registration fees). Stamp duties equal 2% of the company's equity up to 50 million zlotys, plus 1% of the amount from 50-100 million, plus .5% of the amount from 100-200 million, plus .1Z of the sum exceeding 200 million zlotys.

It is widely agreed that these fees, as percentages, are unnecessarily high and encourage firms to incorporate with minimum capital. Furthermore, they do not facilitate easy modifications of a company's Articles of

Association, as locating a notary is itself often difficult, and as the approval process takes days or weeks.

Registration. After the Articles of Association have been notarized, the company must file at the Court of Registration. Registration gives the company legal personality. This application for registration must include the articles of association as well as the identities of the members of the

governing bodies. If the initial capital was raised by public subscription, the application must also include the minutes of the organizational meeting, as well as the list of subscribers and their contributions and shares held.

Currently the greatest difficulty with the Court of Registration is its backlog. On the whole, judges are not seen as incompetent. Rather, due to

lack of modern equipment and well-trained staff, the court is slow. Having "connections" within the court is said to expedite approval and registration.

The shareholders' agreement. The shareholders' agreement, if there is to be one, must also be drafted during this period.20 Included with this can be the reaulamin, or rules governing the supervisory board. As noted earlier, the current Commercial Code leaves parties great freedom to negotiate the terms of these contracts. As a practical matter, however, shareholders'

agreements are said better to be left short and precise (20 pages or less), as Polish partners are believed by some lawyers interviewed to harbor a general

suspicion for long and complex documents, particularly where foreign investors are involved. Because the shareholders' agreement is a private contract among individuals, it is governed by the Civil Code rather than the Commercial Code, although it may not abrogate mandatory provisions of the Commercial Code. Although shareholder agreements are meant to fill in gaps left open by the codes, short shareholders' agreements -nay leave some issues unresolved,

increasing the potential for future d'isputes and litigation.

Summary. The general legal framework set out in the Commercial Code does not in itself restrict the development of the private sector. Refinement of the registration procedure and a reduction of accompanying fees would

certainly facilitate the registration of companies, but these concerns should be subordinate to other areas discussed in this paper, which are in greater

20 Shareholders agreements are a normal feature of business organization in common-law jurisdictions, but have not been typical in civil-law

jurisdictions. They are becoming more common in Poland with increasing foreign investment. They create greater clarity and certainty for shareholders than is possible under Articles of Association alone.

need of attention. There is as yet no limited partnership form; however, the need for this form has been recognized by the legal community and a task force is currently drafting a provision intended to govern this form.

Foreign Investment Law

A new Law on Foreign Investment was promulgated on June 14, 1991. This law establishes the procedures and conditions for setting up a company with foreign participation. It abolishes some of the administrative barriers to foreign investment contained in the former law (dated December 23, 1988). This is not the only law affecting foreign investment, and some important related provisions are included in other laws--including Foreign Exchange Regulations, the Land Management and Expropriation of Real Property Law, sector-specific laws (such as the Banking, Insurance, and Telecommunications Laws), and the Law on Acquisition of Real Property by Foreigners.

Form and Ownership

The foreign investment law applies to investment by non-resident legal or natural persons, including Polish nationals." Foreign persons

(non-residents) may participate only in companies established in Poland, although they may own up to 100 percent of the shares of such a company. Branches of foreign companies are not permitted under this law, although a

separate law regulating foreign branches is expected to be passed in the future. Independent personal services are not explicitly forbidden, but they are not covered by the law and do not enjoy the related protections and

benefits.

The Approval Process

One of the most important changes introduced in the new law is the

abolition of a separate Foreign Investment Agency. A smaller unit will exist in the Ministry of Ownership Changes engaged mainly in promotional

22

activities. The authority of government to screen and approve foreign investment is restricted to a small predefined list of "strategic" areas.

Joint ventures with public enterprises will continue to require government approval.2' The required permission may contain conditions for

21 This may cause some problems, as according to the Constitution all Polish nationals are to be equally treated. On the other hand, some Polish nationals may claim they reside abroad in order to qualify for some of the incentives provided.

22 Several administrative requirements were abolished, such as the evaluation of feasibility studies.

23 The law does not specifically define "state enterprise" though it uses the term, and most assume that this is an enterprise with more than 50 X

the establishment of the enterprise (such as the ratio of foreign to Polish participation or the mandatory ratio of voting rights), depending on the

"subject of activity" of the company. As formulated, Article 19 in fact requires the prior consent of the Ministry of Ownership Changes for a company to diversify its activities. Furthermore, joint ventures with

newly-privatizing enterprises situated on public land will need to deal with the government to acquire land rights, and purchases of land by majority foreign-owned firms require the approval of the Interior Ministry. Even if land purchase is not desired, leasing business premises from the state is itself a

cumbersome process. In effect this means that many joint ventures (i.e. all those with state-owned enterprises or on state-owned land) will continue to require government screening and approval. It is unclear to what extent

managers of small enterprises will be allowed to negotiate and carry out joint ventures with foreign partners. If extensive foreign investment is desired,

the screening process will need to be cursory for smaller projects and serious only for the more significant ones to avoid the re-creation of a large

approval body.

In sum, formally unrestricted foreign investment is in reality only possible for 100 percent foreign-owned companies or ventures with private Polish partners that do not lease or own real property. While the Polish private sector is a growing part of the economy in the trade and services, its

role in industrial manufacturing is still very small. Furthermore, access to real property is a problem for both domestic and foreign private firms, and in-depth .±egotiations with government over real property rights will still be required of all investors for some time to come (see earlier discussion on real property law).

Profit Repatriation

The previous law limited profit repatriation to 15 percent of profits except where the firm generated sufficient net foreign exchange earnings to cover the desired repatriation. The new law allows unrestricted repatriation of all profits, a very important change. Another uncertain area under the old law was the transfer abroad of capital gains. The wording of Article 26

suggests that no restrictions are imposed on the transfer of shares inside Poland and the subsequent repatriation of the proceeds as long as the company is not liquidated during the period of tax incentives or within two years afterwards.

Tax Incentives

The 1988 Foreign Investment law provided for three-year tax holidays, which could be extended up to three more years by the Minister of Finance upon

request. The new law also provides tax incentives for foreign investors, but with greater limitations. A tax credit may be granted by the Minister of

Finance to a company that (a) has a foreign capital contributior. of at least ECU 2,000,000 and (b) operates in regions with high unemployment, is engaged in high-technology activities, or exports at least 20 percent of its

production (Article 23). However, the definition of the tax credit to be provided is not clearly formulated, and there are varying opinions on what it means in practice. The translation of Article 23(6) is approximately as

follows: "The portion of the amount deducted from profit tax (i.e. the tax credit] may not exceed the value of stock and shares acquired by foreign persons." This provision may have one of two interpretations: either the

total amount of the company's tax credit may not exceed the initial capital contributed by the foreign partner, or the proportion of the total tax that may be credited in any one year may not exceed the proportion of total capital

contributed by the foreign partner. Under the first interpretation, no time limit on the credit is needed, and the credit may presumably be used

immediately or over several years. Under the second, there is a need for some time limit unless the Poles intend the credit to be available indefinitely;2 4 no time limit is specified in the present law, although some experts apply

this interpretation and assume a 3-year limit, as existed under the . vious law. In either case, the tax 'ncentives will be difficult to admin. tr, and oversee, given the limited capacity of Polish tax administration.

The definition of foreign investor and related rules make it quite easy for Polish firms to qualify for the incentives. The Commercial Code of Poland does not require that capital contributed to the company be deposited in a

special bank account, nor is the court of registration in a position to check the value assigned to non-cash contributions (especially when they consist of technology or know-how).

Such a system of specialized tax reliefs will continue to cause

distortions and provide incentives for tax evasion and aroidance. It can also lead to political problems because of its favoring of foreign over domestic investment. The experience of other countries (including Bulgaria and

Hungary, as well as many developing countries around the world) makes one question whether the uncertain benefits gained by tax incentive schemes outweigh the obvious loss of revenue and efficiency that result.

Dispute Resolution between Investors and the State

An important area not addressed by the law is dispute resolution.

Although disputes arising under this law can be brought in Polish courts under Polish law, this avenue is unlikely to give confidence to most foreign

investors. Poland does not accede to the Convention for the International Settlement of Investment Disputes ("ICSID"); however, mechanisms for the

settlement of disputes between investors and the government are established in a number of bilateral treaties, including treaties with virtually all major capital-exporting countries.

In sum, the new foreign investment law is an important step forward in removing some of the legal and administrative barriers for foreign direct investment. This step needs to be supported by similar progress in

24 This would amount to a perpetual tax holiday for 100-percent foreign-owned firms.

privatization, real property, and tax law and in institutional strengthening throughout the legal system.

Contract Law

Polish contract law .L embedded in the Polish Civil Code of 1964. This Code was significantly amended in July, 1990. Presently, a reform commission composed of judges, lawyers, and professors is considering further changes. Origins of the 1964 Civil Code

Divided and annexed by Prussia, Austria, and Russia in the eighteenth century, an independent Poland re-emerged following the First World War.

Civil law at the time of re-emergence reflected a complex mix of foreign laws. The Poles responded with a codification movement designed to unify Polish law. Of relevance to contract law were the 1933 Code of Obligations and two 1936 Acts on negotiable instruments--one governing bills of exchange and the other

regulating checks. This codification movement resulted in a contract regime patterned after German and French models. The lax was western, complete with

doctrines of offer and acceptance, rules of fraud, duress, and undue influence, and a statute of frauds.

Under the new political structure after World War II, existing contract law remained in force except where inconsistent with socialist principles. Initially, most of Poland's contract law and law of negotiable instruments remained intact. Socialist conceptions of property and the practice of

central planning, however, soon required changes in the civil law. From 1945 to 1964 adaptations to the 1933 Code of Obligations came through the

promulgation of individual acts and decrees. The aim of 1964 Civil Code was to collect and unify these adaptations.

The Polish Civil Code, as enacted in 1964, reflected a mature system of contract law under socialism. This Code maintained many of the provisions

found in the 1933 Code but tacked on a variety of socialist adaptations. The amenlments of July 29, 1990 reversed this evolution to recreate a civil law attuned to the market rules of the early 1930s.

Central Features of Socialist Contract Law in Poland

Three central features distinguish the Polish contract law of the past twenty-five years from that in western market economies: (1) the presence of central planning and the corresponding distinction between contracts between state enterprises snd contracts between private individuals; (2) the socialist conception of property, including the limitations on private ownership and the preferences afforded to state property; and (3) socialist ideology embodied in the constitutional principle of social co-existence.

Central planning. A principal feature of the 1964 Polish Civil Code was the distinction between contracts between private persons and contracts

between state enterprises. With regard to the former (and to contracts

intact. Within the realm of activity afforded private persons, parties

engaged in contractual conduct in ways similar to that found in western market economies. By contrast, contracting between state enterprises reflected the needs of planning. The "General Conditions of Sale or Delivery" governed state enterprise contracts in detail, and the state (through the plan) had extensive control over whether commercial entities entered into contracts, with whom they contracted, and what conditions would be contained in their

contracts. The Civil Code (articles 397-404) established the possibility of "pre-contractual liability" for state enterprises, that is, a legal duty fo-enterprises to enter into contracts in accordance with state plans. Failure to accept a contract offer in harmony with a state target could result in liability (Article 397). Similarly, failure to create an offer in a timely fashion could also lead to damages (Article 384). In addition, once a

contract was executed between state enterprises, each party became a fiduciary for the interests of the other (Article 355). Article 2 provided

administrative organs with the authority to suspend the operation of the Code, and hence authorized administrative adjustment of contractual terms. Article 386 imposed a duty on all parties to cooperate with such adjustments.

Contractual disputes between state enterprises were to be resolved pursuant to a system of state arbitration, not in the courts (Article 398).

Recent reforms have largely removed the legal distinction between

contracts between individuals and contracts between state enterprises. First, Article 2, which grants administrative authority to suspend the operation of the Code, has been repealed. All contracts, whether between state enterprises or between private parties, are now governed by the same set of laws. In

addition, in 1989 the system of state arbitration was dismantled, and all contractual disputes are now heard by the judiciary.25 And finally, the

system of pre-contractual liability, while still on the books, is seldom used. The first goal of the 1990 amendments was to provide a system of contract law which could be uniformly applied to any type of transaction. This has been

largely achieved.

The socialist conception of property. As noted earlier in the

discussion of real property law, the Civil Code (Articles 126-135) provided for various types of property--social, individual (or private), and personal. Administrative regulations strictly limited the subject matter of private market activities and thus profoundly affected the content and reach of

contract law. Market-based contract principles were allowed to apply only in the sphere of petty trade (for goods under personal or private ownership), and even there price or other government controls often limited the parties'

freedom to contract. In major commercial transactions, the contract

principles associated with central planning were in effect. This strictly limited the Polish experience with the complexities of privately structured contractual relations. Furthermore, the state had certain legal privileges in contracting. For example, state claims were not subject to any statute of limitations, which gave the state distinct advantages in the settlement of claims.

As noted earlier, the July 1990 reforms changed this property scheme. Articles 126 through 135 were repealed. Today there are three types of property--property held by the state treasury, property held by other public enterprises, and private property. The formal preference for state property has been eliminated, and there is no longer a limitation on the private

ownership of property. The second goal of the 1990 amendments waG to provide a uniform contract system for all types of property. This, too, has largely been achieved.

The -rinciple of social co-existence. Changing socio-economic practice in the 1950s demonstrated the need for a more flexible enforcement of Civil Law rules in the interest of equity. In addition, socialist ideology seemed to call for a new set of equitable or moral principles to guide business conduct. The Poles responded to these practical and ideological needs by introducing the principle of "social co-existence" into the Civil Code. Article 5 provides: "A right cannot be used in a way which would be in contradiction with the socio-economic purpose of that right or with the principles of social co-existence in the Polish People's Republic." This section has been used as a check on excessive use of individual rights and creates a possibility for introducing moral standards into contractual conduct. Article 4 operates in a similar fashion. It states: "Civil law regulations should be interpreted and applied in accordance with the

principles of the political system and the objectives of the Polish People's Republic." Here the Code specifically provides for a political check on the

sabstance of private civil agreements.

These articles have been widely used in judicial practice. For example, Article 4 has been used to protect long-term tenants from the harshness of eviction and to shield debtors against the demands to pay interest accumulated over long periods of time. Article 4 was repealed in 1990. Article 5, a

variant of which appears in many civil codes around the world, remains in the Code.

The Current Situation

The Poles are in the process of crafting a set of contract laws

appropriate to a market economy. They started with the existing Civil Code of 1964. Most sections were retained, several sections were deleted, other

sections are to be added, while still other sections must be reinterpreted in the light of current necessity. Thus far, the amendment process has

emphasized deletions. Additions to the Code and re-interpretations of re ained sections are yet to come.

Most of the Civil Code does not need to change. Many of the core rules of contracting--such as rules of offer and acceptance or rules relating to performance--were fashioned in the 1933 Law of Obligations and remained in force throughout the era of central planning. These sections, for the most part, reflect current western practice. Their exact meaning will be filled in

over time through practice and judicial interpretation.

The major deletions taken to date--regarding central planning, property concepts, and socialist ideology--are highlighted above. Other deletions will